US bank regulator: proprietary trading not at core of crisis

WASHINGTON, Feb 2 (Reuters) – The regulator of the largest U.S. banks said on Tuesday that proprietary trading was not at the root of the financial crisis and warned that excessive limits could impair some of banks’ central functions.

“It’s one thing to talk about pure proprietary trading as a business where the bank is in the business of taking bets on particular markets for its own account. And I understand the concern with that going forward, although this was not a big source of the problems that led to the crisis,” Comptroller of the Currency John Dugan told reporters on the sidelines of a securitization conference.

President Barack Obama late last month proposed new limits on big banks’ risk-taking, including curbs on commercial banks’ ability to engage in trading for their own profit instead of for clients.

The proposals would also restrict the banks’ ability to invest in, sponsor or own a hedge fund or private equity fund.

Details of the so-called “Volcker rule” have been scant, and it is unclear if lawmakers will include a version of it in Congress’ sweeping regulatory reform package. White House economic adviser Paul Volcker was to testify on the proposal later Tuesday before the Senate Banking Committee.

Dugan said the definition of proprietary trading will be critical, because some version of such trading is critical to the needs of financial firms’ clients.

“There are other types of principal activities that banks engage in as part of their customer … activities, and there is a recognition of that in the proposal. But how that’s actually defined matters, because those activities are quite central to what banks do in the money center business,” Dugan said.